How to Understand Stock Prices

Stock prices can be really annoying and intimidating if you invested in a company without any market research and basic know-how. Investors who have some experience in stocks are usually concerned about the fluctuating prices of stocks that may make or break their income generation efforts.

Since investors make money on the back of ever-changing stock prices, knowing how the price mechanism works is one of the most important things for newbies. You do not have to be an MBA or a stock analyst to understand how stock prices work and how you can read the stock quotes (usually presented in the form of a table) in newspapers and on websites.

Instructions

  • 1

    Supply and demand factor

    First off, learn how a stock is priced and what factors cause a stock price to decrease or increase. Investors basically earn money by buying a stock at a lower rate and selling it later at higher rates. It is all about supply and demand because when people show interest in the market and buy stocks in droves, stock prices invariably move up because demand is high. However, when people want to sell stocks and there are not many buyers to buy them, prices dip automatically because it reflects huge supply and little demand. Supply and demand can be complex subjects as there are many options available for investors such as derivatives, but you should stick to the basic mechanism of supply and demand, which is usually the main reason behind changes in stock prices.

  • 2

    Stock price is per share price

    When you hear about the stock price of a company, it is usually a per share price, not the total amount of shares the company has floated in the market. Do not confuse the value of the company with the value of its share price because it is market capitalization that determines the company’s value, not the stock price.

  • 3

    Do not judge a company by per share price

    It is not justified to judge a company’s worth by its stock price. A company with a significant market capitalization (number of shares outstanding x price per share) may have a lower share price than a company having small marketing capitalization and a higher stock price.

  • 4

    Read the price quotes

    Price quotes, which are usually mentioned in the form of a table, can be very difficult to understand if you do not know the jargon. Stock tables show a company’s stock in the form of high and low prices during a certain period of time. Learn to read these, or hire a stockbroker who can help in this regard.

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